Magna International Inc

Ticker: MGA, Buy below $50.

Why I Would Buy

1.     Cheap – Magna trades at 8x current earnings and an astounding 5x forward earnings!

2.      Investment grade credit rating – Magna’s long term senior debt was already investment grade, it was recently upgraded another notch by Moody’s (from Baa1 to A3).

3.      Upbeat Analyst Consensus–5 star “strong buy” rated by S&P,  9.7  equity consensus score by Reuters’ (at Fidelity) .

4.      Low Debt – Just 25% of the capital structure is comprised of debt.

5.      Low Payout Ratio – Magna pays out less than 20% of its earnings as dividends.

 What Could Go Wrong

1.       Trump and NAFTA – About 60% sales of Magna’s sales is spread across Canada, US and Mexico, enough said!

2.      Highly Cyclical –  The automotive industry is highly cyclical, Magna is probably riding the crest of an industry peak right now ( the company lost money during 2009 recession).

3.      Meagre Returns of Equity – RoE is my favorite metric for picking stocks, Magna has earned anemic single digit returns on this metric.

Disclosure: I am long MGA, please read additional disclosures here before taking any action based on this post.

Medley LLC 6.875% Senior Notes

Ticker: MDLX, Buy below $25.

Why I Would Buy

  1. Yield – These notes (baby bonds) yield 6.875%! Despite the high yield they are relatively safe.
  2. Investment grade credit rating – The issuer Medley LLC has been rated “A-” by Egan-Jones Rating Company.
  3. Below Par – The baby bond  has a face value of $25 but currently trades below that, creating an opportunity for capital gains.
  4. 3 Year Call Protection – These bonds cannot be called earlier than 8/15/2019.
  5. High Insider Holdings – Insiders hold about 75% of Medley LLC, making it unlikely that they would permit a default or bankruptcy.

What Could Go Wrong

  1. High Yield – 6+% yield is rather high for a safe bond, there could be risks here that I am missing.
  2. Credit Rating Agency –  The A- credit rating was issued by a smaller rating agency. Egan-Jones is not one of the top three rating agencies, however it is a Nationally Recognized Statistical Ratings Organization (NRSRO) just like the three more well known ones.

Disclosure: I am long MDLX, please read additional disclosures here before taking any action based on this post.

 

Daimler AG

daimler

Ticker: DDAIY, Buy below $80.

Why I Would Buy

  1. Cheap – Daimler trades at less than 9 times trailing earnings, 1.3 times book and below 0.5 times trailing sales!
  2. Generous R&D Spend – Daimler consistently spends between 4 to 5% of revenues on research and development. In 2015 this amounted to an astounding 6.5 billion Euros.
2011 2012 2013 2014 2015
5.3% 4.9% 4.7% 4.4% 4.4%
  1. Strong Returns on Equity –Daimler  has posted impressive RoE numbers:
2011 2012 2013 2014 2015
14.6% 17.4% 20.1% 16.4% 15.9%
  1. High Investment Grade Credit Ratings – Daimler enjoys strong credit ratings on its long-term debt (S&P: A-, Moody’s: A3, Fitch: A-).   
  2. Low Payout – Despite a dividend greater than 5%, the payout ratio is at about 40%.

What Could Go Wrong

  1. Poor Cash Flow – The company has surprisingly been negative free cash flow for the past 5 years. The poor cash flow generation is exemplified by it’s operating cash flow in 2015: it was a miniscule 222 million Euros earned on revenues of 149+ billion Euros!
  2. High Beta – Despite having a diversified product line (the ubiquitous Freightliner trucks for example are a part of Daimler’s offerings), a majority of profits are derived from its luxury car business. Luxury vehicle sales tend to suffer during economic downturns; for instance during the financial crisis in 2008 Daimler’s profits cratered and in 2009 it reported a loss.

Disclosure: I am long DDAIY, please read additional disclosures here before taking any action based on this post.

First Guaranty Bancshares

FGBI

Ticker: FGBI, Buy below $18.

Why I Would Buy

  1. Very Cheap – First Guaranty trades at about 8 times trailing earnings. Other than being an obscure microcap stock, there isn’t anything else that I could find to explain this cheapness.
  2. Significant Insider Holding – About a third of the shares are held by management and directors.
  3. Recent Insider Buying – During the past 12 months 600,000 shares were purchased by company insiders, no significant sales were reported.
  4. Strong Returns on Equity – RoE is one of my favorite metrics for evaluating company performance, First Guaranty has posted some impressive numbers: 
    20112012201320142015
    7.37%10.90%9.31%11.40%12.98%
  5. Low Payout – Despite a healthy dividend of approximately 4%, the payout ratio is just 30%.

What Could Go Wrong

  1. Tiny –First Guaranty had a 2015 net income of $just 14.5 million and a market capitalization of about $120 million. Domiciled in Louisiana, it is the only the 7th largest bank in the state.
  2. Revenue PlateauRevenues have been flat for some years:
    20112012201320142015
    $51 mill$53 mill$47 mill$50 mill$56 mill
  3. Mediocre Safety/Stability Rating –First Guaranty is rated only 3 stars (out of a possible 5) by BankRate.com’s “Safe & Sound” bank ratings system.

Please read disclosure here before taking any action based on this post.

Jardine Matheson

Jardines

Ticker: JMHLY, Buy below $60.

Why I Would Buy

  1. Access To High Growth Markets – Jardine Matheson is a conglomerate that operates businesses in South-East Asian markets such as Indonesia, Singapore, Hong Kong etc. Newer investments are in hard-to-access, hyper-growth countries such as Myanmar and Vietnam.
  2. Astute Capital Allocation – Management has displayed strong skills at initiating and expanding ownership in businesses at extremely opportune times. Examples include: scooping up a 50% stake in Indonesia based Astra during the Asian financial crisis, and entering into joint ventures in Myanmar at the first sign of market liberalization there.
  3. Diversified Business Mix – The mix of businesses under the Jardine umbrella are awe-inspiring: real-estate, auto dealerships, hotels, restaurants, palm oil plantations, construction, engineering and more.
  4. Strong Returns on Equity – Jardine Matheson has averaged an impressive 11+% RoE during the past 5 years. Although there are signs of a slow down at Indonesia based Astra, their recent forays into Thailand and Myanmar shows potential for maintaining the high returns.
  5. Fair Price – The Company trades at about 12 times earnings and 1.1 times book.

What Could Go Wrong

  1. Convoluted Shareholding Structure –The conglomerate has a puzzling shareholding structure: Jardine Matheson holds ownership in many of its underlying business via a 83% stake in an intermediate holding company called Jardine Strategic. Jardine Strategic in turn holds a 56% stake in it’s parent Jardine Matheson! Look at the graphic below to see this strange looped shareholding:JardinesComplexHoldings
  2. Dynastic LeadershipThe Company is run by a single family – the Keswicks. The family projects a controlling influence over this conglomerate although it possess only 14% of voting rights. Jardine Matheson does not have professional management, rather the senior-most leadership is dynastic and is derived entirely from the Keswick family.
  3. Currency Risk –JM transacts business in various South-East Asian currencies, these are emerging market currencies and could move in any direction or degree relative to the USD.

Please read disclosure here before taking any action based on this post.